Resolving Goldfinch's bad debts and USDR de-anchoring: RWA is not that simple

Written by Azuma, Odaily Planet Daily

RWA (Real World Assets) is undoubtedly one of the hottest concepts in the crypto industry right now.

As a pioneer representative, Maker opened the income window for U.S. bonds and ate the dividends of the era of the high-interest cycle, which then amplified the market demand for DAI, and finally reversed its market value when the broader market was down. Since then, projects such as Canto and FraxFinance have also achieved some success through similar strategies, the former has doubled the price of the currency within a month, and the sFRAX scale growth rate that the latter has just launched with the V3 version is also quite amazing.

So, is the RWA concept really so “simple and easy to use” that it always improves project fundamentals steadily and quickly? Two recent lessons from the market suggest that things may not be that simple.

Goldfinch bad debt incident

One is Goldfinch’s bad debt incident.

Goldfinch is positioned as a decentralized lending protocol. Since 2021, Goldfinch has raised three funding rounds totaling $37 million ($1 million, $11 million, $25 million), the last two of which were led by a16z.

Unlike traditional lending protocols such as Aave and Compound, Goldfinch primarily serves real-world commercial credit needs, and its general operating model can be divided into three tiers.

! [Analyzing Goldfinch’s bad debts and USDR de-anchoring: RWA is not that simple] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-b1894dd2c6-dd1a6f-69ad2a.webp)

• As the investor, the “User” can inject funds (usually USDC) into different thematic liquidity pools managed by different “borrowers”, and then earn interest income (the income comes from real business profits, which is generally higher than the normal level of DeFi);
• “Borrowers” are generally professional financial institutions from around the world, which can allocate the funds in the managed liquidity pool to those real-world “enterprises” that have needs based on their own business experience;
• After obtaining funds, the “Enterprise” will invest in the development of its own business and regularly use a portion of the proceeds to repay the loan interest to the “User”.

Throughout the process, Goldfinch reviews the borrower’s qualifications and restricts all the details of the terms of the loan to “guarantee” (somewhat ironic) the safety of the funds.

However, the accident happened. On October 7, Goldfinch disclosed through the Governance Forum that there had been an unexpected situation in the liquidity pool managed by “borrower” Stratos, with a total size of $20 million and an estimated loss of up to $7 million.

Stratos is a financial institution with more than ten years of experience in the credit business, and it is also one of Goldfinn’s investors, which seems to be quite “reliable” from the perspective of qualifications, but it is clear that Goldfinch still underestimates the risks.

According to the disclosure, Stratos allocated $5 million of the $20 million to a U.S. real estate leasing company called REZI, and another $2 million to a company called POKT (business unknown, Goldfinch said he didn’t know what the money was for…). ), both companies have ceased to pay interest, so Goldfinch has written down both deposits to zero. **

In fact, this isn’t the first time Goldfinch has had bad debt problems. **In August, Goldfinch disclosed that the $5 million lent to African motorcycle leasing company Tugenden may not be able to recover the principal because Tugenden blindly expanded its business due to a large loss due to Tugenden’s concealment of the flow of funds between its internal subsidiaries. **

The spate of bad debt issues has dealt a serious blow to the confidence of the Goldfinch community, with many community members questioning the transparency of the protocol and its ability to review at the bottom of the disclosure page about the Stratos incident.

USDR unanchoring event

On October 11, the real estate (EMMM) was created by the physical real estate (EMMM, this wave belongs to the double kill… The USDR, a stablecoin backed by it, has begun to de-anchor significantly, and the discount has not eased to be at $0.515. **Based on its float size of 45 million, the total loss of open users is close to $22 million. **

! [Analyzing Goldfinch’s bad debts and USDR de-anchoring: RWA is not that simple] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-38f1d55e45-dd1a6f-69ad2a.webp)

Developed by Tangible on the Polygon chain, USDR can be minted by staking DAI and Tangible native token TNGBL**, which has a collateral minting ratio of 1:1, while TNGBL’s stake size is limited to no more than 10% due to risk.

The emphasis on “physical real estate support” is due to Tangible investing the vast majority (50% - 80%) of its collateralized assets in physical properties in the UK (minting the corresponding ERC-721 certificates upon purchase) and providing USDR holders with additional income through house rentals, thereby increasing demand for USDR and connecting the very large real estate market to the crypto world.

Taking into account the potential redemption needs of users, Tangible will also reserve a certain amount of DAI and TNGBL in the collateralized assets, with a reservation size of 10% - 50% for DAI and 10% for TNGBL.

However, Tangible clearly underestimated the magnitude of redemption demand under a run condition. In the early morning of October 11, 11.87 million DAIs were still reserved in the USDR treasury, but within 24 hours, users redeemed tens of millions of USDRs and exchanged them for more liquid assets such as DAI and TNGBL for selling, which also led to the price of TNGBL being cut, indirectly with the shrinkage of this part of the collateral assets, further aggravating the de-anchoring situation.

Afterwards, Tangible has announced a three-step disposal plan:

• First, emphasize that USDR still has a collateralization ratio of 84%;
• The second is to tokenize the property it owns (if there is no demand, it will consider liquidating the property directly);
• The third is to redeem USDR in the form of “stablecoin + real estate token + hedging TNGBL”.

According to overseas KOLWismerhill’s estimates, USDR holders are expected to be returned:

• $0.052 worth of stablecoins;
• $0.78 worth of real estate tokens;
• $0.168 worth of hedged TNGBL.

! [Analyzing Goldfinch’s bad debts and USDR de-anchoring: RWA is not that simple] (https://img-cdn.gateio.im/webp-social/moments-69a80767fe-ef3cb2847d-dd1a6f-69ad2a.webp)

All in all, payouts may be able to “return blood” to holders, but USDR is destined to become history, and this real estate-based RWA attempt ended in failure.

Experience and lessons

From the success of protocols such as Maker, and the failures of Goldfinch and USDR, we may be able to draw the following lessons.

**The first is the selection of off-chain asset classes. **Considering factors such as risk rating, pricing clarity, and liquidity status, U.S. Treasuries remain the only fully validated asset class today, and the relative disadvantages of non-standard assets such as real estate and corporate loans will bring additional friction to the entire business process, which in turn will hinder its large-scale adoption.

**The second is about the liquidity unbinding of off-chain assets and on-chain tokens. **Analyst Tom Wan said in the reason for the de-anchoring of USDR that Tangible could have minted the on-chain voucher representing real estate in the form of ERC-20, but chose to use the relatively “solidified” ERC-721 form, which made it impossible to continue to redeem the empty mortgaged property after the DAI reserve was depleted. Real estate is illiquid, but Tangible could have improved the situation on-chain with additional design.

** The third is the review and supervision of off-chain assets. **Goldfinch has exposed its management failure to manage the real execution status of the chain, even if it has launched a special review role within the agreement, and has chosen a relatively credible own investor in the management of “borrowers”, but in the end it has not been able to avoid the abuse of funds.

** The fourth is the collection problem of bad debts under the chain. **Crypto’s borderless nature gives on-chain protocols the freedom to conduct business regardless of geography (except for regulatory factors), but when problems arise, it also means that it is difficult for the protocol to implement local bad debt collection, especially in those regions where laws and regulations are not yet in place, and the practical difficulty will only be infinitely magnified. Taking Goldfinch as an example, can you imagine a couple of New York white-collar workers running to Uganda to ask for money from those who rented motorcycles…

All in all, RWA has brought Crypto imagination about the incremental market, but as of now, it seems that only the “brainless stud” US Treasury path will work. However, the attractiveness of U.S. bonds is closely related to macro monetary policy, and if the former yield begins to decline with the latter’s turn, there will be a question mark on whether this path can continue to be smooth.

At that time, expectations around RWA may shift to other asset classes, which will require practitioners to face the challenges head-on and blaze new trails.